CA SHREY RATHI HOUSE PROPERTY 4.

Mahatma Gandhi

CHAPTER 4
HOUSE PROPERTY

"Live as if you were to die tomorrow.

Learn as if you were to live forever.”

SCOPE OF THIS CHAPTER

❖ Comprehend when income shall fall under the head “Income from House Property”;
❖ Determination of annual value for different types of house property;
❖ Computation of interest on borrowed capital for purchase/construction/repair of house property;
❖ Calculate income from co-owned properties;
❖ Tax treatment on recovery of unrealised rent and arrears of rent;
❖ Concept of deemed ownership

INTRODUCTION
Income from House Property is one of the five heads of income. Income from letting-out of premises shall be main talk of
the chapter. The owner of the property shall be charged to income tax on the income that he has earned from his property.
Further, the owner might have taken loan on this property. Interest on such loan shall also be considered in this chapter.

FAQ by Students:

Sir, my dad has a commercial shop in Delhi.

He has let-out this shop to someone.
Whether the rent received by my dad will Ans: Yes. As per Income Tax Act, 1961, House
be taxable under this head only? Property shall include any building including
flats, shops, commercial building, factory
sheds & farm houses.
CA SHREY RATHI HOUSE PROPERTY 4.2

METHOD OF COMPUTATION UNDER HEAD INCOME FROM HOUSE PROPERTY

Income under the head house property
Particulars (₹) (₹)
Gross Annual Value xxx
Less: Municipal Taxes (actually paid by the owner) xxx
Net Annual Value (NAV) xxx
Less: Deductions u/s 24
(a) Standard Deduction @ 30% of Net Annual Value xxx
(b) Interest on borrowed capital xxx xxx
Add: Recovery u/s 25A xxx
Income chargeable under the head “House Property” xxx

BASIS OF CHARGE [SECTION 22]

Income under the head house property is taxable when all the following 3 conditions are satisfied:
(i) The property should consist of any building (whether residential or commercial) & land appurtenant thereto. But
income from letting out of only vacant land shall be taxable under the head income from other sources or profit &
gains from business or profession as the case may be.
(ii) The assessee should be the owner of such property.
(iii) The property should not be used by the owner for the purpose of any business or profession, the profits of which
are chargeable to income tax except Section 23(5) (to be discussed on Pg. 4.10).

Let us understand this with the help of an example:

Shrey lets out this Titu sub-lets a part of the

property to Titu for ₹ property to Kiku for ₹
30,000 p.m. 12,000 p.m.

Mr. Shrey is the Owner of

Titu is the tenant Kiku is the sub-tenant
this house

Conclusion: In this case, Rent received by Mr. Shrey shall be taxable under the head House Property as all the following
conditions are satisfied:
Q 1. The property
1: Vacant consists
site lease rent isoftaxable
a building.
as:
2. Mr. Shrey is the owner of the building.
3. Mr. Shrey is not utilising such building for the purpose of his business or profession
However, rent received by Titu from Kiku shall not be taxable under this head as Kiku is not the owner of the property.
Such Rent shall be taxable under the head ‘Income from Other Sources’.

Q 1: Vacant site lease rent is taxable as:

(a) Income from house property
(b) Business income or income from house property, as the case may be
(c) Income from other sources or business income, as the case may be
(d) Income from other sources or income from house property, as the case may be [Ans: (c)]
CA SHREY RATHI HOUSE PROPERTY 4.3

Q 2: Mr. Ashok has a property which is partly let out and partly used for his own business. Which portion will be taxable
u/h House Property?
(a) Only the let-out portion shall be taxable u/h House Property
(b) The whole property shall be taxable u/h House Property
(c) Portion used for business purpose shall be taxable u/h House Property
(d) None of the above [Ans: (a)]

DETERMINATION OF ANNUAL VALUE [Section 23(1)]

The first step in computing income u/h house property is to find out the Gross Annual Value of the property.

(a) EXPECTED RENT OR

The gross annual value of any property shall be the sum for which the property might reasonably be expected to be let
from year to year. It is like a notional rent which could have been derived had the property been let out.
Expected Rent is higher of Municipal Value or Fair Rental Value but shall be limited to Standard Rent.
In simple words, Expected Rent = Municipal Value (MV)
or Higher
Fair Rental Value (FRV) or Lower
Standard Rent (SR)
Expected rent is always computed for 12 months except when the assessee is not the owner of the property or where
the construction of the property got completed between the year.

FAQ by Students:

Sir, what if I purchase the property from Titu

on 1st December, 2021. In this case, for how
many months expected rent shall be
calculated? Ans: Expected Rent shall be computed for 8
months for Titu and 4 months for Kiku

❖ Municipal value: It is the value that the municipal authorities deem as the value of the property for the purpose of
assessment of property taxes.
❖ Fair rent: It is the rent fetched by a similar property, in same or similar locality with same facilities.
❖ Standard rent: It is the maximum rent which a person can recover from the tenant, under the Rent Control Act.

Q 3: Mr. Abhinandan purchased a property on 31st August 2021. The Municipal Vale of the property is ₹ 2,40,000 p.a., Fair
Rental Value is ₹ 25,000 p.m. & Standard Rent is ₹ 2,30,000 p.a. Compute Expected Rent.
(a) ₹ 2,30,000 (c) ₹ 1,75,000
(b) ₹ 1,34,167 (d) ₹ 1,40,000 [Ans: (b)]

Q 4: What is fair rent of house property?

(a) the rent of similar types of buildings in the same locality
(b) rental value determined by the municipality for the purpose of charging municipal tax
(c) rent received or receivable
(d) none of the above [Ans: (a)]
CA SHREY RATHI HOUSE PROPERTY 4.4

(b) ACTUAL RENT OR

Where the property or any part of the property is let and the actual rent received or receivable is in excess of the sum
referred to in clause (a), the amount so received or receivable shall be the GAV.

Q 5: Compute GAV in the following cases: (₹)

Cases I II III IV V
Fair Rental Value 36,000 28,000 22,000 84,000 46,000
Municipal Value 38,000 27,000 24,000 82,000 56,000
Standard Rent 36,000 30,000 N.A. 76,000 N.A.
Actual Rent 42,000 26,000 23,000 70,000 65,000
GAV 42,000 28,000 24,000 76,000 65,000

(c) ACTUAL RENT WITH VACANCY

Where the property or any part of the property is let and was vacant during the whole or any part of the previous year and
owing to such vacancy, the actual rent received or receivable is less than the sum referred to in clause (a), the amount so
received or receivable shall be the GAV.

If a property is ready to be let, but could not actually be let throughout the previous year, this clause is applicable and
GAV in such case shall be NIL.

Q 6: Municipal value of a house is ₹ 1,00,000, Fair rent ₹ 1,30,000, Standard rent ₹ 1,20,000. The property has been let out
for ₹ 12,000 p.m. and was vacant for 3 months during the P/Y 2021-22. Municipal taxes paid during the year were ₹ 40,000.
Calculate the net annual value for the A/Y 2022-23.

Sol 6: Computation of Net Annual Value

Particulars (₹)
Municipal Value ₹ 1,00,000
Fair Rental Value ₹ 1,30,000
Standard Rent ₹ 1,20,000
Expected Rent (Higher of Municipal Value or Fair Rental Value but limited to Standard 1,20,000
Rent)
Actual Rent (₹ 12,000 x 9) 1,08,000
o In the case of vacancy, if AR falls below ER due to vacancy, AR shall be GAV. In this
case AR receivable is (₹ 12,000 x 12 = ₹ 1,44,000) which is higher than the ER but due
to vacancy, it came down to be ₹ 1,08,000. Therefore GAV = AR received
Gross Annual Value (Expected Rent or Actual Rent whichever is higher) 1,08,000
(-) Municipal taxes paid 40,000
Net Annual Value 68,000

Unrealised rent – The amount of rent which the owner can not realise shall be equal to the amount of rent payable but not
paid by the tenant and so proved to be lost and irrecoverable where:
(i) the tenancy is bona-fide;
(ii) the defaulting tenant has vacated or steps have been taken to compel him to vacate the property;
(iii) the defaulting tenant is not in occupation of any other property of the assessee;
(iv) the assessee has taken all reasonable steps to investigate legal proceedings for the recovery of the unpaid rent or
satisfies the Assessing officer that legal proceedings would be useless.

The Unrealised Rent shall be reduced from the Actual Rent while determining Gross Annual Value.
CA SHREY RATHI HOUSE PROPERTY 4.5

Q 7: Compute GAV in the following cases: (₹ in ‘000)

Cases M N O P Q
Municipal Value 70 50 60 40 120
Fair Rental Value 78 57 68 48 130
Standard Rent 73 52 70 45 140
Actual Rent 77 59 72 60 135
Unrealised Rent 02 08 04 20 45
Loss due to vacancy 01 01 02 03 -
GAV 74 52 66 45 130

Q 8: Treatment of unrealized rent for determining income from house property

(a) To be deducted from expected rent
(b) To be deducted from actual rent
(c) To be deducted from gross annual value
(d) To be deducted from both expected rent and actual rent [Ans: (b)]

ANNUAL VALUE OF A PROPERTY WHICH IS PARTLY LET OUT AND PARTLY SELF-
OCCUPIED

If a property consists of two or more independent residential units, one of which is self-occupied and other units are let
out, then income shall be computed as under:

Property used for residential Let out units – the annual value
purpose or could not be occupied Self shall be determined as per
owing to employment at any other Let - out Section 23(1). GAV = ER or AR
occupied
place, the annual value shall be nil. whichever is higher.

• Municipal valuation / Fair rent / Standard rent, if not given separately, shall be apportioned between the let - out portion
and self – occupied portion on built – up floor space or on such other reasonable basis.
• Property taxes, if given on a consolidated basis, can be bifurcated as attributable to each portion or floor or on a
reasonable basis.

Q 9: Mr. Abhay let out his property for ₹ 5,000 p.m. but the tenant did not pay for 5 months. Expected rent is ₹ 4,000 p.m.
Compute GAV.

Sol 9: Computation of Gross Annual Value

Gross Annual Value = Expected Rent or Actual Rent whichever is higher
Particulars (₹)
Expected Rent (₹ 4,000 x 12) ₹ 48,000
Actual Rent (₹ 5,000 x 12) – (₹ 5,000 x 5) ₹ 35,000
➢ Unrealised Rent is deducted from the AR and then it is compared with ER for computation of GAV
Gross Annual Value
48,000
CA SHREY RATHI HOUSE PROPERTY 4.6

Q 10: Ms. Priya owns a house property whose municipal value is ₹ 180,000, Fair rent is ₹ 1,70,000 & Standard rent is ₹
1,56,000. It is let out for ₹ 10,000 p.m. upto October end and then for ₹ 14,000 p.m. till 31st January 2022. Ms. Priya sold
the property on 1st February 2022. Find out the GAV of the property in the hands of Ms. Priya for the A/Y 2022-23.

Sol 10: Computation of Gross Annual Value

Gross Annual Value = Expected Rent or Actual Rent whichever is higher
Particulars (₹)
Municipal Value ₹ 1,80,000
Fair Rental Value ₹ 1,70,000
Standard Rent ₹ 1,56,000
➢ As Priya sold the property on 1 February 2022, ER shall only be computed for 10 months only (₹
st

1,56,000 x 10/12 = ₹ 1,30,000) 1,30,000

Actual Rent (₹ 10,000 x 7) + (₹ 14,000 x 3) 1,12,000
Gross Annual Value 1,30,000

ANNUAL VALUE OF SELF-OCCUPIED PROPERTY OR UNOCCUPIED PROPERTY [Section

23(2)]
Net annual value of self-occupied property shall be nil if the assessee satisfies any of the two following conditions:

(a) The house property is utilised throughout the previous year for self-
residential purpose.
FULLY SELF (b) The house property which is not actually occupied by the owner owing to
OCCUPIED employment or business or profession carried on at any other place and he
has to reside in a building not owned by him. It shall also be noted that the
property belonging to the assessee has not been let out during whole or any
part of the previous year.

No deduction for municipal taxes is allowed in respect of such house property.

If the house property is occupied by relatives of owner for the purposes of their residence, benefit of self-occupation
shall not be available.
Benefit of “Nil” Annual Value is available only for upto two self – occupied or unoccupied house properties and is
available only to Individual / HUF.

ANNUAL VALUE OF A PROPERTY WHICH IS SELF-OCCUPIED FOR A PART OF THE YEAR

AND LET OUT FOR REMAINING PART OF THE YEAR [Section 23(3)]

Annual value shall be computed as per section 23(1) in which higher of the following two shall be considered as annual
value:
(a) Expected rent for 12 months.
(b) Actual rent received or receivable for let out period.
CA SHREY RATHI HOUSE PROPERTY 4.7

Let us understand this with the help of an example:

Mr. Shrey was using the property for self-occupation

purpose till 31.08.2021. From 1.09.2021 the property was
let-out to Titu for ₹ 40,000 p.m.

Mr. Shrey is the owner of Titu is the tenant

this house

Conclusion: In this case, gross annual value shall be higher of following two:
(a) Expected rent for 12 months.
(b) Actual rent received or receivable for let out period. [In this case: ₹ 40,000 * 7 = ₹ 2,80,000]

Where Fair Rental Value is not given then actual rent shall be assumed as FRV. It shall be noted that such assumption is
applicable in this case only and not under any other case.

Q 11: Pawan self-occupied his property for 4 months and let out his property for 7 months for ₹ 14,000 p.m. The property
remained vacant for one month. The municipal value of the property is ₹ 10,000 p.m. Compute the GAV.
(a) ₹ 1,54,000 (c) ₹ 98,000
(b) ₹ 1,20,000 (d) ₹ 1,68,000 [Ans: (d)]

Q 12: Mr. Shiv has let out his property for 8 months @ ₹ 9,000 p.m. The property was self-occupied for the rest of the period.
Fair rental value of the house is ₹ 6,500 p.m. Compute his NAV assuming he paid ₹ 8,000 as municipal taxes.

Sol 12: Computation of income from house property for Mr. Shiv:
Particulars (₹) (₹)
Expected Rent [Municipal Value or Fair Rent whichever is higher but limited to Standard
Rent] [As only fair rent is given, it shall be deemed as ER] (₹ 6,500 x 12) 78,000
Actual Rent for let out period (₹ 9,000 x 8) 72,000
GAV [ER or AR whichever is higher] 78,000
Less: Municipal Taxes paid 8,000
Net Annual Value 70,000

ANNUAL VALUE WHERE ASSESSEE HAS MORE THAN TWO HOUSES FOR SELF-
OCCUPATION [Section 23(4)]

(a) Assessee has the discretion to choose two houses which he can treat it as self-
occupied properties. Therefore, the annual value of the chosen property shall
be nil.
(b) The annual value of other houses (“deemed let out properties”) shall be
determined as if such houses have been let out (i.e. as per Section 23(1)).

The assessee should choose the option which has lower taxable income.
This option can be changed year after year in a manner beneficial to the assessee.
CA SHREY RATHI HOUSE PROPERTY 4.8

Q 13: Mr. Lokesh has three houses, all of them are self-occupied. The details relating to the houses are as follows:
House I (₹) House II (₹) House III (₹)
A. Municipal Value 70,000 1,30,000 1,00,000
B. Fair Rental Value 85,000 1,20,000 1,10,000
C. Standard Rent - 1,25,000 1,20,000

D. Municipal Taxes paid 8,000 12,000 11,000

Suggest which house should be opted by Lokesh to be assessed as self-occupied so that his tax liability is least.

Sol 13: Computation of income from house property for Mr. Lokesh: (₹ in ‘000)
Particulars Option 1 Option 2 Option 3
H1 H2 H3 H1 H2 H3 H1 H2 H3
(SO) (SO) (DLO) (SO) (DLO) (SO) (DLO) (SO) (SO)
Gross Annual Value
ER [MV or FRV whichever is higher but - - 110 - 125 - 85 - -
limited to SR]
As all the houses are self-occupied, there
will be no Actual Rent. Therefore GAV =
ER
Less: Municipal Taxes paid - - 11 - 12 - 8 - -
Net Annual Value - - 99 - 113 - 77 - -
Less: Deductions u/s 24
(a) Standard Deduction @ 30% - - 29.7 - 33.9 - 23.1 - -
Income u/h House Property - - 69.3 - 79.1 - 53.9 - -
Total Income 69.3 79.1 53.9
Since income from Option 3 is the least, Mr. Lokesh should choose H2 & H3 as self-occupied properties.

Q 14: Mr. Ankit constructed a house in 1985 and it is let out for 4 months and self-occupied for 6 months and remained
vacant for 2 months during the previous year 2021-22. Municipal valuation of the house is ₹ 21,000 p.m. and fair rent is ₹
18,500 p.m. Standard rent of the house is ₹ 19,000 p.m. It was let out @ ₹ 16,000 p.m. Municipal taxes levied is ₹ 8,000 out
of which ₹ 3,000 was paid by the tenant, ₹ 2,000 by the owner and balance is yet to be paid. Compute his NAV.

Sol 14: Computation of NAV for Mr. Ankit

Particulars (₹)
Expected Rent [Municipal Value or Fair Rent whichever is higher but limited to Standard Rent] (₹ 19,000
x 12) ₹ 2,28,000
Actual Rent received (₹ 16,000 x 4) ₹ 64,000
GAV = ER or AR whichever is higher 2,28,000
Less: Municipal taxes paid (taxes paid by the landlord are only allowed as deduction) 2,000
Net Annual Value 2,26,000
There was a vacancy of 2 months. Actual rent would have been ₹ 96,000 in case of no vacancy. In this case the actual
rent receivable is already less than the expected rent even in the situation of no vacancy, therefore the higher of the ER
or AR shall be taken.
CA SHREY RATHI HOUSE PROPERTY 4.9

QUICK REVISION
The Gross Annual Value of any property shall be deemed to be:

If House is let out If House is let out and was If House is let out in part of year
through out vacant whole or part of and was occupied for
previous year previous year remaining part of the year

Actual rent is less than In any other case

Expected or Actual rent
Expected rent owing to
whichever is higher
such vacancy

Expected or Actual rent whichever is

Actual Rent received / receivable higher

ANNUAL VALUE WHERE HOUSE PROPERTY HELD AS STOCK-IN-TRADE [Section 23(5)]

Where the property is held as stock-in-trade & the whole or any part of the property is not let during the whole or any part
of the previous year, then the net annual value of such property or part of the property shall be nil. Such benefit would be
available for the period upto two years from the end of the financial year in which certificate of completion of construction
of the property is obtained.

NET ANNUAL VALUE

Net Annual Value = Gross Annual Value (GAV) – Municipal taxes actually paid by the owner
Notes regarding Municipal Taxes:
1. Taxes levied by any local authority is respect of the property shall be deducted in determining the annual value of the
property of that previous year in which such taxes are actually paid by him (irrespective of the previous year in which
the liability to pay such taxes was incurred).
2. Municipal taxes are always computed on municipal value. Where municipal taxes are given on percentage basis then
such percentage shall be applied on the municipal value to arrive at municipal taxes.
3. NAV can’t be negative if municipal taxes actually paid during the year are more than GAV. It shall be restricted to the
extent of GAV.
4. Municipal taxes paid abroad are also allowed as deduction if income from such property is taxable in India.
5. In case of self - occupied / unoccupied house property for which “Nil” Annual value benefit is claimed, deduction of
municipal taxes paid is not allowable.

Q 15: Municipality has levied taxes of ₹ 45,000 but the assessee has paid ₹ 55,000 which includes ₹ 5,000 for the earlier
year and ₹ 5,000 for the subsequent year. What amount of deduction shall be allowed to the assessee?
(a) ₹ 45,000 (c) ₹ 55,000
(b) ₹ 50,000 (d) ₹ 60,000 [Ans: (c)]
CA SHREY RATHI HOUSE PROPERTY 4.10

DEDUCTIONS U/S 24

Deductions from annual value:

(a) STANDARD DEDUCTION – 30% of net annual value is deductible irrespective of any expenditure incurred by the
assessee.
(b) INTEREST ON BORROWED CAPITAL – It is allowed as deduction if the capital is borrowed for the purpose of
purchase, construction, repair, renewal or reconstruction of the property.

FAQ by Students:

Sir, my uncle took a loan to purchase a

house property. However, due to some
reason, he was unable to repay the interest
on loan in this year. What shall be the
treatment in this case? Ans: Interest on borrowed capital is deductible on
accrual basis. It can be claimed on yearly basis even
if interest is not actually paid during the year.
However, interest on unpaid interest is not
deductible.

The following points should also be kept in mind:

1. Interest on a fresh loan taken to repay the original loan is allowed as deduction.
2. No deduction is allowed for any brokerage or commission for arranging the loan.
3. Any interest payable out of India on which tax has not been paid or deducted at source and in respect of which there is
no person who may be treated as agent is not deductible.
4. Unpaid purchase price would be considered as capital borrowed:
Where a buyer enters into an arrangement with a seller to pay the sale price in instalments along with the interest due
thereon, the seller becomes the lender in relation to the unpaid purchase price and the buyer becomes the borrower.
In such a case, unpaid purchase price can be treated as capital borrowed for acquiring property and interest paid
thereon can be allowed as deduction under section 24.

Q 16: Mr. Kanhaiya has a house in Mumbai. 60% of the house is let out for ₹ 20,000 p.m. while the rest is self-occupied by
him. He has provided the following details:
(₹)
1. Municipal Value 3,50,000
2. Fair Rent 25,000 p.m.
3. Standard Rent 24,000 p.m.
4. Municipal taxes paid during the year 40,000
5. Interest on borrowed capital 2,00,000
Compute his income from house property.
CA SHREY RATHI HOUSE PROPERTY 4.11

Sol 16: Computation of income from house property for Mr. Kanhaiya: (₹)
Particulars Let Out (60%) Self-occupied
(40%)
Gross Annual Value [ER or AR whichever is higher]
Let out portion: ER = MV or FRV whichever is higher but limited to SR = ₹
2,88,000 x 60% = ₹ 1,72,800
AR = ₹ 20,000 x 12 = ₹ 2,40,000
Self-occupied portion: NAV is always nil 2,40,000 Nil
Less: Municipal taxes paid 24,000 (40,000 x 60%) Nil
Net Annual Value 2,16,000 Nil
Less: Deduction u/s 24
(a) Standard Deduction @ 30% 64,800 Nil
(b) Interest on borrowed capital (divided proportionately) 1,20,000 80,000
Income u/h House Property 31,200 (80,000)
Total Income u/h House Property (48,800)

Q 17: Deduction under section 24(a) is:

(a) 1/3rd of NAV (c) Repairs actually incurred by the owner
(b) 30% of NAV (d) Interest on borrowed capital [Ans: (b)]

PRE-CONSTRUCTION PERIOD INTEREST: It is deductible in 5 equal instalments. The first instalment is deductible in
the year in which construction of property is completed or in which property is acquired.
Pre-construction period means the period commencing on the date of borrowing and ending on:
(a) 31st March immediately prior to the date of completion of construction / date of acquisition
or
(b) Date of repayment of loan
whichever is earlier.

POST-CONSTRUCTION PERIOD INTEREST: Interest for the year in which construction is completed / property is
acquired. Interest is fully deductible in that year irrespective of the date of completion / acquisition.

DEDUCTION IN RESPECT OF SELF-OCCUPIED OR UNOCCUPIED PROPERTY WHOSE NET ANNUAL VALUE IS NIL
Interest on borrowed capital is deductible upto ₹ 2,00,000 if the following 3 conditions are satisfied:
(i) The property is acquired or constructed with capital borrowed on or after 01.04.1999.
(ii) Acquisition or construction is completed within 5 years of the end of the financial year in which the capital was
borrowed.
(iii) The person extending the loan certifies that such interest is payable in respect of the amount advanced for acquisition
or construction of the house.
In any other case wherein capital is borrowed for repairs or renewals or reconstructed or conditions mentioned above are
not satisfied – maximum amount of deduction on account of interest shall be ₹ 30,000.

DEDUCTION IN RESPECT OF LET OUT PROPERTY

Interest on borrowed capital is deductible fully without any maximum ceiling limit.

Interest on borrowed capital table

Particulars Self-occupied property Let out property
Acquired / Constructed with loan borrowed on or after ₹ 2,00,000 No Limit
01.04.1999.
Repair / renewal / reconstruction of the property or loan ₹ 30,000 No Limit
borrowed before 01.04.1999.
CA SHREY RATHI HOUSE PROPERTY 4.12

Chart wise presentation of deduction of interest

18-19 19-20 20-21 2021-22 2022-23 to 2025-26

Pre-construction period Post-construction period

Year of purchase or year in
which construction gets completed
Interest of 2022-23, 23-24
Total Interest Interest of 2021-22: 100% allowed 24-25 or 25-26 as the case
5 + may be + Total Interest / 5
Total Interest / 5

Q 18: Mr. T borrowed ₹ 5,00,000 @ 12% p.a. on 1/4/2017 for construction of house property which was completed on
2/4/2021. The amount of loan is still unpaid. What will be the deduction of interest for PY 2021-2022 if the house property
is let out:
(a) ₹ 30,000 (c) ₹ 96,000
(b) ₹ 1,08,000 (d) ₹ 2,40,000 [Ans: (b)]

Q 19: Ms. Radha took a loan on 01.02.2019 of ₹ 3,50,000 @ 12% p.a. for construction of her flat. She repaid the entire loan
on 28.02.2020. Construction got completed on 31.01.2022. Compute the deduction of interest for the P/Y 2021-22.

Sol 19: Computation of interest on borrowed capital for Ms. Radha:

Pre-construction period interest: Pre-construction period means the period commencing on the date of borrowing and
ending on:
(i) 31st March immediately prior to the date of completion of construction / date of acquisition or
(ii) Date of repayment of loan
whichever is earlier.
Pre-construction period: 01.02.2019 – 28.02.2020
₹ 3,50,000 x 12% x 13/12 = ₹ 45,500
Pre-construction period is permissible as deduction in 5 equal instalments = ₹ 45,500/5 = ₹ 9,100.
There will be no post-construction period interest as the entire loan is paid before the P/Y 2021-22.
Total interest on borrowed capital = Only pre-construction period interest = ₹ 9,100.

Q 20: Mr. Hanuman took a loan of ₹ 3,00,000 @ 10% p.a. on 01.12.2019. He took another loan of ₹ 5,00,000 on 01.04.2020
@ 10%. He repaid ₹ 2,00,000 on 01.08.2020. Construction of house is completed on 01.11.2021. Compute deduction of
interest for the P/Y 2021-22.

Sol 20: Computation of interest on borrowed capital for Mr. Hanuman:

Pre-construction period interest: Pre-construction period means the period commencing on the date of borrowing and
ending on:
(i) 31st March immediately prior to the date of completion of construction / date of acquisition or
(ii) Date of repayment of loan
whichever is earlier.
CA SHREY RATHI HOUSE PROPERTY 4.13

Pre-construction period: 01.12.2019 – 31.03.2021

₹ 3,00,000 x 10% x 4/12 = ₹ 10,000
₹ 8,00,000 x 10% x 4/12 = ₹ 26,667
₹ 6,00,000 x 10% x 8/12 = ₹ 40,000
Total = ₹ 10,000 + ₹ 26,667 + ₹ 40,000 = ₹ 76,667
Pre-construction period is permissible as deduction in 5 equal instalments = ₹ 76,667/5 = ₹ 15,333.
Post-construction period interest: 01.04.2021 – 31.03.2022
₹ 6,00,000 x 10% x 12/12 = ₹ 60,000
Total interest on borrowed capital = Pre-construction interest + Post-construction interest
= ₹ 15,333 + ₹ 60,000 = ₹ 75,333.

RECOVERY OF ARREARS OF RENT & UNREALISED RENT [Section 25A]

Where the assessee could not realise rent or where there is an arrears of rent from a property let out to a tenant and but
the assessee has subsequently realised any amount in respect of such rent, then the amount so realised shall be deemed
to be income chargeable under this head in that previous year in which such rent is realised whether or not the assessee is
the owner of that property in that previous year.

A sum equal to 30% of the unrealised rent recovered shall be allowed as deduction.

FAQ by Students:

Sir, I have received arrears of rent

pertaining to PY 2017-18 on 1.08.2021.
Ans: No, arrears of rent will not impact the GAV.
Whether such arrears will impact the
It shall be treated separately and made taxable
computation of GAV?
after deducting 30% from it.
Even recovery of unrealised rent will not impact
computation of GAV.

Let us understand this with the help of an example:

Mr. Shrey lets out this property to Titu in FY 2019-20

for ₹ 30,000 p.m.
Titu didn’t pay rent of 4 months to Mr. Shrey.
However, in FY 2021-22, Mr. Shrey recovered ₹ 1 lakh
from Titu.

Mr. Shrey is the Owner of Titu is the tenant

this house

Conclusion: In this case, ₹ 1 lakh will be considered as deemed to be income chargeable under this head in FY 2021-22.
Further, 30% deduction shall be allowed from ₹ 1 lakh and balance ₹ 70,000 shall be made taxable.
CA SHREY RATHI HOUSE PROPERTY 4.14

Q 21: An assessee who claimed deduction of unrealized rent for ₹ 45,000 and was allowed ₹ 40,000 as deduction. Later, he
realized ₹ 30,000 along with arrear of rent being ₹ 45,000. What will be the taxable amount?
(a) ₹ 49,000 (c) ₹ 61,500
(b) ₹ 52,500 (d) ₹ 66,000 [Ans: (a)]

PROPERTY OWNED BY CO-OWNERS [Section 26]

(a) Where house property is self-occupied by each co-

owner: the annual value of the property shall be nil
and each co-owner shall be entitled to the deduction
TITU KIKU ARE of ₹ 30,000/2,00,000 as the case may be on account of
CO-OWNERS interest on borrowed capital.
(b) Where the entire or part of the property is let: the
income shall be computed as if this property is owned
by one owner and thereafter the income so computed
shall be apportioned between the co-owners as per
their definite share.

Q 22: X, Y & Z are three equal co-owners of the property situated in Mumbai which has 6 identical units. X & Y have occupied
one unit each for their residence. Other four units are let out to a tenant at a rent of ₹ 40,000 p.m. The municipal value of
the house is ₹ 6,00,000. The other particulars regarding the house property are as under:
1. Municipal Taxes paid ₹ 60,000
2. Insurance premium paid ₹ 17,000
3. Interest on borrowed capital (for construction of house) ₹ 3,00,000
Compute the income u/h house property and the income of each co-owner assuming loan has been borrowed before
01.04.1999.

Sol 22: Computation of income u/h house property & income of each co-owner:
Particulars 2 units (SO) (₹) 4 units (LO) (₹)
Gross Annual Value [ER or AR whichever is higher] - 4,80,000
ER = ₹ 6,00,000 x 4/6 = ₹ 4,00,000
AR = ₹ 40,000 x 12 = ₹ 4,80,000
GAV for self-occupied units shall be nil
Less: Municipal taxes paid - 40,000
Net Annual Value - 4,40,000
Less: Deductions u/s 24
(a) Statutory deduction @ 30% - 1,32,000
(b) Interest on borrowed capital 60,000 2,00,000
Income u/h House Property (60,000) 1,08,000
Total 48,000
As the loan is borrowed before 01.04.1999, maximum deduction in respect of interest on borrowed capital shall be ₹
30,000 instead of ₹ 2,00,000 per owner in case of self-occupied units.
Income of each co-owner:
Particulars X (₹) Y (₹) Z (₹)
Self-occupied units (1:1) (30,000) (30,000) -
Let out units (1:1:2) 27,000 27,000 54,000
Total (3,000) (3,000) 54,000
CA SHREY RATHI HOUSE PROPERTY 4.15

COMPOSITE RENT

The owner charges rent from the tenant not only on account of rent for the house property but also on account of various
facilities/services provided with the house. Such rent is known as composite rent.

(a) Where letting of property is separable from letting of the other assets: then the rent attributable to the letting of the
premises shall be assessable u/h House property and the other portion of the composite rent shall be assessable u/h
Income from other sources.
(b) Where letting of the property is inseparable: then the entire income shall be assessable u/h PGBP or Income from other
sources.

Q 23: Mr. Shantanu let out his house for ₹ 12,000 p.m. Municipal value and FRV of the house are ₹ 1,30,000 and ₹ 11,000
p.m. respectively. Municipal taxes paid were ₹ 9,000. Interest on borrowed capital was ₹ 25,000. He also provided the
following facilities to tenant which were included in the actual rent:
a. Furniture – ₹ 250 p.m.
b. Air Conditioner – ₹ 400 p.m.
c. Cook, gardener & watchman – ₹ 800 p.m.
d. Electricity and water – ₹ 300 p.m.
Compute his income from house property.

Sol 23: Computation of income from house property for Mr. Shantanu:
Particulars (₹)
Gross Annual Value [ER or AR whichever is higher] 1,32,000
ER = MV or FRV whichever is higher but shall be limited to SR = ₹ 1,32,000
AR = (₹ 12,000 x 12) – {(₹ 250 + ₹ 400 + ₹ 800 + ₹ 300) x 12} = ₹ 1,23,000
Less: Municipal taxes paid 9,000
Net Annual Value 1,23,000
Less: Deductions u/s 24
(a) Statutory deduction @ 30% 36,900
(b) Interest on borrowed capital 25,000
Income u/h House Property 61,100
Rent charged for facilities shall be deducted from the actual rent as they have been separately charged.

DEEMED OWNERSHIP [Section 27]

Besides the legal owner, the following persons are deemed to be the owners of house property for the purpose of charging
tax on annual value under the head Income from house property.

(a) Transfer to spouse or minor child [Section 27(i)]

If an individual transfer any house property to the aforesaid persons for inadequate consideration, then the transferor shall
be deemed as the owner of the property so transferred.
CA SHREY RATHI HOUSE PROPERTY 4.16

Exception: Where the property is transferred to spouse in connection with an agreement to live apart or where a property
is transferred to a minor married daughter.

Let us understand this with the help of an example:

Mr. Shrey transfers the house of market value of ₹

10,00,000 to his wife only for ₹ 4,00,000. The
income from such property is ₹ 1,50,000

Mr. Shrey is the owner of

this house Spouse of Mr. Shrey

Conclusion: In this case, Mr. Shrey transferred his house to his spouse for inadequate consideration. Therefore, he will
be deemed to be the owner of the house to the extent of such inadequacy of consideration i.e. 60%. Rest 40% shall be
assessed in the hands of the spouse.

Another example: Mr. Rathi gifts ₹ 30,00,000 to his wife and the wife purchased a house property of ₹ 30,00,000 out of
such money. In this case, Section 27 shall not apply as it deals with the transfer of property and not with the transfer of any
other asset. Therefore, in this case Mr. Rathi cannot be deemed to be the owner of such house property.

(b) Holder of an impartible estate [Section 27(ii)]

The impartible estate is a property which is not legally divisible. So the holder of individual property shall be deemed to be
the individual owner of all properties comprised in the estate.

(c) Member of a co-operative society/AOP etc. [Section 27(iii)]

A member to whom a building or part thereof is allotted or leased under the house building scheme of the society, AOP etc.
is treated as deemed owner of such property.

(d) Person in possession of a property [Section 27(iiia)]

A person who is allowed to take or retain any building or part thereof in part performance of a contract of the nature
referred to in Section 53A of the Transfer of Property Act shall be deemed as owner of that house property.
This would cover cases where:
(i) Possession of property has been handed over to the buyer.
(ii) Sale consideration has been paid or promised to be paid by the buyer.
(iii) Sale deed has not been executed in favour of the buyer although certain other documents like power of attorney,
agreement to sell etc. have been executed.

(e) Person having right in a property for a period not less than 12 years [Section 27(iiib)]
The lessee of a building in case building is leased out for not less than 12 years is deemed as owner. This will not cover cases
where any right by way of a lease is acquired from month to month basis or for a period not exceeding one year.

→ For e.g.: Mr. Sharma gives his house property on lease to Mr. Verma for a total period of 15 years, but the lease is to be
renewed annually during this period. In such case, though the lease is for a period exceeding 12 years, but the same is
to be renewed annually for a period not exceeding 1 year. Therefore, such case will not fall u/s 27 and Mr. Sharma shall
be treated as the owner of such property.
CA SHREY RATHI HOUSE PROPERTY 4.17

→ For e.g.: Mr. Lakhoti gives his house property on lease to Mr. Chander for a total period of 14 years, under which the
lease shall be renewed after every 2 years. In this case, as the lease period exceeds 12 years and such lease is renewed
after every 2 years (i.e. a period exceeding 1 year), then Mr. Chander shall be deemed to be the owner of such property.
Disputed Ownership – The Income Tax department decides the ownership till the Court gives its decision regarding
the title of ownership. Generally, the recipient of income is considered to be the owner of the property.
Q 24: Raman gave his house to his wife, Rashi under an agreement to live apart. Who shall be deemed owner of the house?
(a) Raman (c) equally in hands of Raman and Rashi
(b) Rashi (d) None of the above [Ans: (b)]

QUICK REVISION BEFORE EXAMS

Section Particulars
22 Basis of Charge: An assessee should satisfy all the 3 conditions to fall u/h House Property:
1. Property should consist of any building (land attached is allowed). But only vacant land shall be treated
u/h PGBP or IOS;
2. Assessee must be the owner of such building;
3. Such building should not be utilised by the owner in his Business or Profession [except Sec. 23(5)]
23(1) Determination of Annual Value:
(i) GAV = ER or AR, whichever is higher
(ii) However, where due to vacancy, AR is less than ER, then AR shall be GAV.
Unrealised rent shall be deducted from Actual Rent Receivable first followed by loss due to vacancy in
order to arrive at Actual Rent received.
Property partly let-out & partly self-occupied:
GAV for let out portion = ER or AR, whichever is higher
NAV for self-occupied portion = Nil
23(2) Net Annual Value of a self-occupied property = Nil
23(3) Annual Value of a property which is self-occupied for part of the year & let-out for the remaining part of the
year: Higher of
(i) ER for 12 months or
(ii) AR for let out period
23(4) Annual value of deemed to be let-out properties: Assessee can claim benefit of Nil NAV in respect of any two
self-occupied properties. The other properties shall be deemed to be let-out. GAV for deemed to be let-out
properties = ER
23(5) Annual value of a property held as SIT: NAV of such properties for 2 years from the end of the FY in which
certificate of completion of construction of the property is obtained shall be NIL.
24 Deductions from NAV
(a) Standard Deduction: 30% of NAV
(b) Interest on borrowed capital: It is divided into 2 parts:
1. Pre-construction period Interest: Interest for the period prior to the P/Y in which property is acquired or
constructed. Such interest is deductible in 5 equal instalments starting from the year in which property is
acquired or construction is completed.
2. Post-construction period interest: Allowed fully in that year itself
Maximum Limit for Interest on Borrowed Capital
Particulars Self-occupied Let out property
property
Acquired / Constructed with loan borrowed on or after ₹ 2,00,000 No Limit
01.04.1999.
Repair / renewal / reconstruction of the property or loan ₹ 30,000 No Limit
borrowed before 01.04.1999.
25A Taxability of recovery of unrealised rent & arrears of rent received:
1. Taxable in the year of receipt.
2. Deduction @ 30% of amount realised.
CA SHREY RATHI HOUSE PROPERTY 4.18

26 Co-owned property:
❖ Self-occupied property: NAV shall be nil. Each co-owner shall be allowed deduction of ₹ 30,000 / ₹
2,00,000, as the case may be.
❖ Let-out property: Assume one owner and compute income. Then apportion the income as per their specific
share.
Composite Rent:
❖ Where rent of premises and facilities is segregable: the rent from premises shall be taxable u/h HP & the
rent relating to facilities shall be taxable u/h IOS or PFBP, as the case may be
❖ Where rent of premises and facilities is not segregable: then the entire amount is taxable u/h IOS or PGBP.
27 Deemed Ownership:
1. Transfer of property to spouse or minor child (except minor married daughter), without adequate
consideration.
2. Holder of an impartible estate
3. Member of a co-operative society
4. Person in possession of a property
Person having right in a property for a period not less than 12 years

NOTES FOR STUDENTS

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